Using the Lipper Leaders scoring system to analyse the best performing funds in the IA UK Equity Income sector.
Pity the poor UK equity income fund manager: you rebound from the great dividend freeze of 2020, your sector is in the top 10 over the past year … and you’re still haemorrhaging assets. For example, despite beating the returns of global equity funds in 2021—which have been sucking in huge amounts of money—the Investment Association UK Equity Income sector saw outflows of almost £5bn in 2021.
Of course, it’s long-term returns that really matter, and here the story is rather different. Three- and five-year average sector returns are 24.9% and 22.5%, respectively, whereas for global equity funds those numbers are 63.5% and 74.1%. But then, unless you’re holding out for Zeno and his famous paradox, the long term is just a bunch of short terms stuck together. So, could the past 12 months represent a turning point for equity income?
While 2020 saw a swingeing suspension of dividends resulting from the COVID crisis, payments have bounced back, albeit not yet to pre-pandemic levels. This may take some time, with research from one asset manager suggesting the median bear market for inflation-adjusted dividends is nine years, compared with 1.8 years for total returns: dividends take longer to recover, although companies normally restore them after a cut, as they grow more slowly than inflation over an extended period. And, if dividends don’t keep up with inflation, the price of these stocks may fall until the payout rises to meet inflation. All this is, of course, very relevant in the current inflationary environment.
Value Tailwind
On the other hand, value stocks tend to do better than growth in inflationary environments, and the traditional core of income portfolios—for example, tobacco, energy, financials, and utilities—tend to have a value bias, which will be to their benefit.
In short, assuming inflation persists over the coming period, it’s uncertain as to how this will impact the sector.
That said, although these are equity income funds, the income element isn’t the determining factor in their performance. While the dividend yield on the FTSE 100 was 4.1% in 2021, the sector average was just 3.5% for the year, and the 10 funds in the table delivered a yield of barely more, at 3.7%. Only one—WS Charteris Premium Income—beat the FTSE yield, paying 5.4%. No other fund in the table below met the FTSE dividend average. The last time we looked at the sector, in September 2020, while its average dividend over the year was 4.3%—above that of the FTSE—the average for the top 10 was 3.6%. This, perhaps, is a moot point, as it’s likely that most equity income investors are prioritising total return (which may explain why they’re increasingly looking elsewhere).
The range of three-year returns runs from 47.3% to -16.3%—although the latter is very much an outlier, with all other funds in positive territory over the period.
In September 2020 we noted that three funds had retained their position in the top 10 since just before the pandemic broke that January—the ASI UK Income Equity, Janus Henderson UK Responsible Income funds, and Santander Enhanced Income Portfolio. They retain their places on the table below. The Janus Henderson offering is notable in that in a sector that tends to go looking for its yield in tobacco, oil, and gas stock—and therefore doesn’t have many ESG funds—it’s the exception in the top 10.
Overall, while UK equity income investors have had a pretty decent 12 months, the longer-term outlook seems unlikely to bring the sector back into the limelight.
Table 1: Top-Performing UK Equity Income Funds Over Three Years (with a minimum five-year history)
All data as of December 31, 2021; Calculations in GBP
Source: Refinitiv Lipper
This article was originally published in Moneyfacts, p13
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